It’s the economy stupid

Any prescription to revive the national economy should necessarily involve a detailed diagnosis of what went wrong in the first place. Naturally, the spectacular growth rate of the economy between 2005 and 2011 [barring 2008-09, owing to global economic crisis] requires a relook to understand the present consternation.

It is in this connection Ruchir Sharma points out in Breakout Nations: “In the peak year of 2007, the economies of all but three of world’s 183 countries grew, and they expanded at better than 5 per cent in 114 countries.”

In short, between 2004 and 2009 coinciding with the first term of UPA, global economy witnessed unprecedented growth coinciding with a remarkable performance of her manufacturing sector which in turn was export driven.

Any prescription to revive the national economy should necessarily involve a detailed diagnosis of what went wrong in the first place. Naturally, the spectacular growth rate of the economy between 2005 and 2011 [barring 2008-09, owing to global economic crisis] requires a relook to understand the present consternation.

It is in this connection Ruchir Sharma points out in Breakout Nations: “In the peak year of 2007, the economies of all but three of world’s 183 countries grew, and they expanded at better than 5 per cent in 114 countries.”

In short, between 2004 and 2009 coinciding with the first term of UPA, global economy witnessed unprecedented growth coinciding with a remarkable performance of her manufacturing sector which in turn was export driven.

The subsequent fall since 2011 corresponds to a dismal performance of our manufacturing sector. In short, the core of India’s current economic crisis [I am using the word “crisis” advisedly] is the pathetic performance of her manufacturing sector.

Put pithily, a revival of the economy is necessarily intertwined with the revival of the manufacturing sector. It may be recalled in a message to “The National Strategy for Manufacturing” prepared by the National Manufacturing Competitiveness Council Prime Minister Manmohan Singh states “I am concerned that the share of manufacturing in national income has shown only a marginal improvement from 15.8% in 1991 to 17% in 2003. This should be somewhere in the range of 25% to 35%. This requires manufacturing to keep growing at 12-14% in the next decade.” This was in March 2006.

Subsequently, in a press release dated November 4, 2011 [i.e. more than five years since the national strategy was unveiled] the ministry of commerce and industry stated “The share of manufacturing in India’s GDP has stagnated at 15-16% since 1980 while the share in comparable economies in Asia is much higher at 25 to 34%.”

And as a part of its diagnosis it added “On an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Apart from facing multiple inspections, these units have to file sometime as many as 100 returns in a year.”

The worst hit with this draconian regime are our SMEs which contribute about 45% to the manufacturing output and 40% of exports. Importantly, they offer employment opportunities both for self-employment and jobs.

As several sample surveys initiated by the government indicate, this regime of excessive regulation, draconian laws and corrupt regulators has dynamited the Indian manufacturing from within One wonders what prevented the UPA from doing away with this regime. Deregulation of such laws would be the first big agenda for the next government.

And the issue is not merely limited to legislation. It encompasses a whole range of governance issues including but not limited to infrastructure improvement, availability of skilled labour, technological absorption capacity in each industry, curbing inflation.

Be that as it may, there is another burning issue that needs to be addressed by the next government. Data provided by the Economic Survey of 2012 reveals that the average daily percapita food grain consumption of an Indian in 1965 was 418 grams and that of pulses, 62 grams. Remember, in 1965 we had a war with Pakistan on top of a deadly drought.

Approximately after five decades of our “successful” tryst with green revolution, the survey shockingly points out that the average daily per capita food grain consumption of an Indian in 2010 was a meagre 407 grams and a disappointing 32 grams of pulses. Obviously, we are not producing enough food grains or pulses now when compared to 1965 on a per capita level.

No wonder when it comes to the Global Hunger Index as calculated by the International Food Policy Research Institute has placed India at a precarious 64 out of 79 countries. Put differently, we are just at the bottom when it comes to tackling hunger. To eliminate hunger, India needs to produce a minimum of 350 MT and distributed in its entirety.

The Montek-Chidambaram-Manmohan troika has been placing too much reliance on the service sector to engine our growth for too long. The time for such short cuts is over. On the contrary, it is time for the next government to focus on the real economy — agriculture and manufacturing.